Why Good Labor Practices Are Good for Business: Lessons From BSR’s DR-CAFTA

Authors

• Alison Colwell

  Former Associate Director, BSR

Simple measures like labeling toxic chemicals and organizing tools mean much safer working conditions on Costa Rican coffee farms. Engaging workers at a Honduran banana plantation contributes to their sense of empowerment while also increasing farm productivity. Partnering with the government of El Salvador to include good labor practices in its procurement checklist—just like price and quality—can improve working conditions nationwide as suppliers change practices to meet this important buyer’s criteria.

These are just a few of the important benefits documented in several case studies BSR is publishing about 15 demonstration projects implemented over the past year to examine the real-life effects of improved responsible labor on key industries in Central America and the Dominican Republic.

In these projects, which are part of our DR-CAFTA Responsible Competitiveness Project, we worked with corporate responsibility organizations in the region, local producer companies, international brands, local unions and labor groups, and government ministries to improve working conditions in both factory and agricultural settings. The case-writing team, led by Professor Richard Feinberg of the University of California, San Diego, provides an outside perspective on some of the successes and challenges associated with responsible labor programs.

Our case studies suggest that responsible labor practices translate into financial rewards through expanded markets, higher productivity, reduced costs of compliance, and lower turnover. BSR’s experience has shown that the stories these cases tell are applicable not just in the DR-CAFTA region, but more broadly across a wide range of industries, economies, and geographies.

While the DR-CAFTA agreement itself does not include provisions for monitoring and evaluating labor compliance, local producers who don’t make the grade risk losing their international buyers, who don’t want their brands associated with sub-par working conditions.

What follows are some key benefits of investing in responsible labor practices. These benefits apply to both multinational companies that buy from the region, as well as to local producer companies.

Increased Access to Markets

As consumers become more sophisticated about the products they choose to buy, companies are being more selective about which local producers they use. To broaden their access to markets, producers can go beyond local legal minimums and position themselves as recognized leaders—allowing international buyers to confidently check off the “reputation risk” box on their purchasing checklists.

El Salvador’s sugar industry is a case in point. In the past decade, the industry risked losing important buyers as child labor in Salvadoran sugar production grabbed international headlines, thanks in part to a Human Rights Watch report published in 2004. Even before the report, however, local sugar mills had identified child labor as a serious issue and had come together through the El Salvador Sugar Association to work with producers to eradicate child labor in sugar production. Upon release of the report, Coca-Cola committed to working with the association and the ILO to create alternatives for children to study instead of work.

The results have been dramatic. Between 2003 and 2008, the number of children working in cane fields dropped by 72 percent, according to the Salvadoran Ministry of Education. The change has also helped the Salvadoran sugar industry: Five years ago, the sugar industry feared that buyers would pull out of the country and look to “safer” regions from which to buy their sugar. Today, many international buyers view El Salvador as a leader in the fight against child labor. This perception can help sway buyers to purchase from a provider in that country instead of from a provider in a laggard country.

Increased Productivity

Our case studies suggest that investing in better working conditions—sometimes just by starting a dialogue with workers—improves employee productivity.

For a long time, Central America’s banana industry has been known for tense relations between companies and workers. These strained conditions can limit opportunities for open dialogue and can even lead to violence. Productivity often suffers in this context because the workers are not included in discussions on how to make improvements.

Finca Tropical—a banana plantation in Honduras—partnered with BSR and local organization FUNDAHRSE to train managers and workers on interpersonal communication and group facilitation. We created forums for managers and workers to come together and brainstorm simple, practical changes to improve farm productivity. BSR also provided workers with traditional management tools such as stakeholder-mapping and mission- and goals-setting to help them better understand the company as a whole and the importance of their contribution to overall business success. As the case study documents, workers began a dialogue with management on how they could improve their performance and efficiency on basic tasks, and management responded with productivity incentives. In the end, workers reported improved morale, and managers reported increased productivity.

Reduced Operating Costs

BSR’s DR-CAFTA project is also showing the link (sometimes direct, sometimes indirect) between labor practices and costs. One example is the Canadian apparel-maker Gildan, which operates Central America’s largest sewing plant in Honduras, employing approximately 5,000 workers.

The Honduran textile and apparel industry faces fierce competition from Asia, a situation that often leads employers to pursue cut-throat labor practices. But Gildan decided to take a different approach, looking to gain a competitive advantage by improving health and safety practices. This helped the company save money by reducing the costs of compliance usually associated with meeting those standards.

This shift in focus from basic compliance toward continuous improvement has produced notable change. Our case study documents how health and safety issues have been included in the annual performance evaluations of managers across all functions at the plant, and health and safety trainings now incorporate employees’ priorities and concerns.

The accountability issue alone is critical. Because managers’ annual performance evaluations now include health and safety issues, managers are responding more rapidly to new initiatives, which reduces the time to implement management innovations and the associated administrative costs. While firm data are yet to come, managers are convinced that these short-term changes will reduce costs related to absenteeism and will increase worker productivity over the long term.

Reduced Turnover

An increasing number of studies are showing that salary isn’t the only motivator of high performance and loyalty; many other factors come into play. Our case studies support this, suggesting that leading labor practices also contribute significantly to employee loyalty.

This is true especially in fast-growing sectors like Costa Rica’s electronics industry. Today, the communications technology industry comprises 12 percent of the country’s gross national product and more than a quarter of its exports. Global companies such as Intel have invested in Costa Rica’s electronics industry, which has helped create an internationally competitive cluster of high-tech service providers. The industry’s rapid growth has also led to a shortage of trained software developers and high turnover, particularly affecting small- and medium-sized businesses that struggle to compete with the salaries offered by large companies.

In partnership with six local software companies, as well as the Costa Rican business association AED and the Costa Rican Chamber of Information and Communications Technologies (CAMTIC), BSR investigated the reasons for high turnover and discovered that the companies were offering inconsistent salaries with no mechanism for incentives and bonuses. We also discovered that employees at these companies believe that they have limited opportunities for career advancement. With orientation and training costs estimated at US$4,000 per new employee, BSR recommended that companies focus investments on incentives and rewards to retain workers.

Participating companies are also implementing changes to make their work environments more employee friendly, such as increasing professional development training hours, adding flex time and telecommuting opportunities, and increasing the frequency of manager-employee meetings. Managers see that employee morale is improving, and they are confident that these changes will help reduce long-term turnover rates.

Taking the First Steps

The demonstration projects of our DR-CAFTA Responsible Competitiveness Project make a strong case for why investing in responsible labor practices is good for businesses globally. Next week, we’ll use examples from these same case studies to examine what companies can do to start implementing change.

These demonstration projects and case studies were made possible by a grant from the U.S. Department of State to BSR for its DR-CAFTA Responsible Competitiveness Project. The project works with producers, labor, government, and international buyers to promote responsible labor practices in countries of the Dominican Republic-Central America-United States Free Trade Agreement (DR-CAFTA). For more information, visit www.drcafta.bsr.org.